top of page

Keyhole Financial


The Five False Facts About Investing in Distressed Second Mortgages.

I’ve been investing in distressed second mortgages for over 17 years. I’ve seen a lot of changes; some based on the economy, some based on supply and demand and some based on falsehoods that new investors have held onto while entering this industry.

While you can’t control changes within the economy or supply and demand, I believe you can do something about falsehoods and misrepresentations.

About two years ago, I started Keyhole Academy, an online education program teaching students how to invest in first and/or second distressed mortgages. I wanted to apply my years of experience and put it in a format that I felt people would most benefit from.

While trying to solicit potential students who either weren’t investing at all or just investing in first mortgages, here are the top objections I received:


This was by far the biggest concern I heard. Many potential students had full-time jobs and thought that both learning and managing their investments would take up too much of their valuable time. This couldn’t be further from the truth! On average, my students finished studying my 26 chapter online course, “The Business of Investing in Distressed Second Mortgages” within three weeks. This only entailed reading about one hour per day.

As far as “running” the business, this is up to each individual and how much time they want to put into it. Perhaps one of the most time-consuming chores is finding loans to purchase. Yes, there are other investors and small hedge funds to buy loans from, but the real reward is if through your own research and networking you’re able to find a new source with new loans. Now you’ve struck oil!

Once you’ve done the proper due diligence and purchased your loans, the rest is easy. Let’s say you purchased five distressed second mortgages. After you file the Assignment of Mortgage and send out your Welcome Material, it’s now down to contacting your borrowers. The first month you start calling and find that one or two borrowers will start paying their monthly mortgages they owe. Maybe another borrower wants to settle with you with a short sale. And the other two borrowers either can’t be found or refuse to pay. At this point, you pretty much know where you stand and what you have to do. Maybe you spend one to two hours a week managing your portfolio.

If someone asked you in exchange for an extra 6-8 hours of work per month you could have the opportunity to increase your money by potentially 25-30%, what would you say?


No matter what you’re going to invest in, you must ask yourself:

  1. How much money do I want to invest?

  2. How much money am I realistically looking to make?

  3. What is my risk tolerance?

When I compare investing in distressed first mortgages versus distressed second mortgages, the differences are quite clear. When investing in distressed first mortgages, you can expect to pay anywhere from $.60-.75 cents on the dollar. This means if you purchase a $100,000 first mortgage, you’ll pay about $70,000 for that note. While there are creative ways to fund your purchase, the bottom line is you’re on the hook for that amount. Additionally, if you were able to buy three distressed first mortgages and one of those mortgages did poorly, 1/3 of your portfolio is affected.

When buying distressed second mortgages, you can buy about five loans for $20,000. Not only are you able to get into the market cheaper, but if one of your loans does poorly, that’s only 20% of your portfolio.

The first question I ask potential investors is how much money do you have access to and/or are willing to invest? If the answer is over $100,000, I suggest to them that they’re able to invest in both first and/or second mortgages. However, if the amount is below $100,000, they should probably be only investing in second mortgages.


Investing in distressed seconds is risky for the sole reason that it’s in second position behind the first mortgage. I’ve found that in most cases in today’s economy, if the first mortgage forecloses on the borrower, there won’t be any money left over (surplus) for the second mortgage.

If you want to invest in distressed seconds, this is a fact that you have to accept. A certain percentage of your portfolio will succumb to being foreclosed on and you’ll lose your initial investment for those loans. Conversely, because you’re buying distressed seconds so inexpensively, on the other loans you’ll see a much bigger return on your investment than you would if investing in distressed firsts (even with the foreclosure losses).

Let’s take a look at five loans I purchased last spring:

1. Rodriguez UPB: $23,485 PAID: $3,000 Rodriguez couldn’t afford his $320 monthly mortgage and we agreed on $225 for six months. 2. Morrison UPB: $33,018 PAID: $4,000 Morrison began paying his original $477 monthly mortgage.

3. Witherspoon UPB: $17,480 PAID: $2,250 Witherspoon refused to pay anything. I will do nothing as it’s not worth foreclosing on him. We’ll see what happens and I’ll check up on him every 3-4 months.

4. Luxley UPB: $38,185 PAID: $3,500 Within the first three months, Luxley was foreclosed on with no surplus. I lost $3,500. 5. Steinhart UPB: $44,700 PAID: $4,500 Steinhart and I agreed to a settlement of $20,000.

As you can see by my examples above, even with losing my initial investment on Luxley and not having Witherspoon paying, I’m still on track to be extremely profitable.

What I’ve learned in my 17 years is whether you’re buying five loans or five hundred, if you know what you’re doing, statistically, you can expect the same percentages as far as how many borrowers will be paying, how many will be doing short sales or payoffs, how many won’t pay and how many will be foreclosed on. That’s the secret to success!


Another false fact! For anyone just starting out and looking to buy notes, the fact is they’re probably only going to buy in small amounts (under ten notes). With this number, there are plenty of other investors and small hedge funds that are continuously selling these quantities.

The key to conquering this challenge is twofold. The first is the need to network! In order to find these other investors and small hedge funds, you need to get out there and meet others in your industry. A great way to do this is through meet-up groups, seminars, Linked-In, Facebook and other organizations.

One of the recommendations I make to all of our students is that upon graduation from Keyhole Academy, they create an email that they send to friends, family and associates announcing the venture they’ve embarked on. This should include what they’re now doing and what they’re looking for in terms of finding notes. It works!

The second way to find notes is through good old-fashioned cold calling. There’s a website called, Lane Guide. Once you join, this website lists every financial institution in the U.S. You can narrow down your search and start calling. I train my students how to do this in order to get the most out of their calls.


The truth here is that like anything else, if you want to be good at something, you need to work hard. If you want to be really good at something, you need to work hard and smart.

Part of working smart is not reinventing the wheel. That’s why I started Keyhole Academy--So others can learn from my mistakes and profit from my experience.

My online course allows students to go at their own pace and each chapter has quizzes, videos, and audio--a final exam is given at the end. You can repeat the course as many times as you like.

It was important for me to address each of the above concerns so that potential investors can truly understand the real facts about investing in seconds. The truth is I’m continually gaining knowledge learning from others and love sharing what I’ve learned.


bottom of page